Strategic theory says that to be successful, a company must create a distinctive value proposition that meets the needs of a chosen set of customers. It seeks to obtain competitive advantages with an adequate configuration of its value chain or through the set of activities involved in the creation, production, sale, delivery and support of its products or services.
The point is that they have paid more attention to the sector or business, where they have sometimes overlooked the profound effect that localization has on productivity and innovation.
The companies focused on attracting consumers to buy more and more of their products. Facing mounting competition and short-term shareholder pressure, executives resorted to successive restructuring, downsizing, and relocation in lower-cost regions. The most frequent results are commoditization, price competition, little real innovation, slow organic growth, and no clear competitive advantage.
With the current globalization many companies no longer recognize a place as their home, but rather see themselves as "global" companies. With vertical integration using external providers or relocations, their connection with their communities was weakened, losing important opportunities for value creation.
In these situations, the communities where companies operate receive few benefits (layoffs, relocations…) when they simultaneously increase business profits. Rather, they perceive that the profits of the companies are produced at their expense, an impression that has strengthened during the current recovery of the economy, where little has been done to alleviate high unemployment, the shortages of local companies and the severe pressures on community services.
The concept of shared value can be defined as the operational policies and practices that improve the competitiveness of a company while helping to improve economic and social conditions in the communities where it operates.
Shared Value
In the business world, the globalization of markets implies greater innovation for greater productivity and competitiveness. Furthermore, companies have to be economically sustainable and in balance with the social and environmental aspects in order to have a reputation with their stakeholders and public opinion in general. Their survival over time is highly dependent on meeting these requirements, especially when customers are more informed through the internet and social media.
In this context, the concept of “creation of shared value” is very important. Its creator is Michael Porter, Professor Emeritus at Harvard University, a leading expert on new business management issues. The creation of shared value seeks to reinvent capitalism and release a wave of innovation and growth.
The concept of shared value is defined by Porter as “the policies and operational practices that improve the competitiveness of a company, while helping to improve economic, social and environmental conditions in the communities where it operates. It focuses on identifying and expanding the connections between economic and social progress. Companies create shared value, reconceiving products and markets; redefining productivity in the value chain and building support clusters for the sector around the company's facilities ”. (Galvis, 2013)
Origin
After the Brundtland Report in 1987, a series of alternatives began to emerge aimed at finding a way how to maintain a balance between the essence of the company (economic value) and social and environmental needs; until then excluded from that corporate vision.
This is how the concept of Corporate Social Responsibility refers to the need to incorporate social and environmental considerations, as a result of the impact of the operation of a company. Some authors argue that a definition with this scope could be too general, so that when it comes to Corporate Social Responsibility, it refers to a very broad concept that can say a lot and nothing concrete at the same time.
In 2011, an alternative emerged that seeks to specify, synthesize and pragmatize the CSR proposals existing at the time. This is how the concept of Shared Value arises.
Thus, shared value refers to operational policies and practices that improve competitiveness, while helping to improve economic and social conditions in the communities where it operates.
A fundamental element to understand the concept, is established by the same applicants Porter and Kramer, when they define that economic value is the result of benefits in relation to costs and that social issues must be addressed by companies from the same concept of value, not as peripheral issues.
From another perspective, one of the main criticisms of CSR can be found in the following excerpt:
Whatever definition is adopted, they all agree on the need to promote good business practices by taking responsibility for the impacts generated by the productive activity to which the company is dedicated. In the long term, these good practices contribute to the creation of a greater social value for the company that benefits its stakeholders.
In other words, the traditional approach to CSR postulates that good practices to assume the impact of corporate operations lead, in the long term, and indirectly, to creating social value. This is where what is possibly the main theoretical differentiator between Social Responsibility and Shared Value is found.
Instead, Shared Value proposes a more advanced CSR model, which addresses social problems from the center, instead of seeing them from the periphery; being that it is not social responsibility, nor philanthropy, nor sustainability, but a new form of economic success in which the creation of social value is not in the margin of what companies do but in the center.
From this point of view, the Shared Value applicants think that CSR programs are a reaction to external pressure and have emerged mainly to improve the reputations of companies (solidarity marketing), so that they are treated as a necessary expense, and that any further step is considered as an irresponsible use of the shareholders' money. (Vinicio, 2015)
Differences between Shared Value and Social Responsibility
Corporate Social Responsibility
Value: Doing good.
Civics, philanthropy and sustainability.
Discretionary or in response to external pressures.
Disengaged from profit generation.
The agenda is determined by external reports and personal preferences.
Impact is limited by corporate footprint or CSR budget
Example: Purchase of products made according to fair trade principles.
Shared Value
Value: Economic and social benefits related to cost.
Creating joint value for the company and the community.
Integrated into competition and innovation.
Integrated to profit maximization.
The agenda is dictated by the company and is generated internally.
Realign the entire company budget.
Example: Transformation in acquisitions to increase quality and performance.
Steps to generate Shared Value
Reconceive products and markets
Society's needs are enormous: health, better housing, better nutrition, aid for the elderly, greater financial security, less environmental damage. It could be said that they are the main unmet needs in the global economy.
In advanced economies, the demand for products and services that meet the needs of society is growing rapidly. Thus, for example, food companies, traditionally focused on flavor and quantity, are refocusing on the fundamental need for better nutrition or on certain needs, such as, for example, food for coeliacs.
A continuous exploration of the needs of society will lead companies to discover new opportunities for differentiation and repositioning in traditional markets, in addition to recognizing the potential of new markets that they have previously ignored.
To meet needs in poorly served markets, for example gluten-free foods, redesigned products or different distribution methods are required. These requirements can lead to fundamental innovations that could also be applied in traditional markets, such as microcredits, designed to meet the unmet financing needs in developing countries, but which today is growing rapidly in Europe and the United States. United, where you are filling an important gap that had not been recognized.
An example is in how the pharmacy business has changed. On your shelves it is difficult to see a medicine. They have expanded their business, among others, to dermopharmacy for, for example, skin care, homeopathy, weight loss treatments, products associated with nutrition for all ages, they have extended hours…
Redefine productivity in the value chain
There are many ways in which a company can obtain economic benefits by addressing societal problems. With this new mindset we will see that the congruence between social progress and productivity in the value chain is much greater than traditionally thought. This synergy grows when firms approach social problems from a shared value perspective and devise new ways of operating to deal with them.
There are unequivocal signs of a change. Previously it was thought that efforts to minimize pollution inevitably raised costs for companies and were only due to legal requirements and fees. Today, there is a consensus that improvements in environmental management, which can be achieved with better technology, implies very important savings due to better use of resources, by having more efficient processes and, ultimately, products with a level of quality. higher.
Let's look at some of these savings:
Improvement in the use of energy. Energy use across the value chain is being re-examined due to high energy prices and a new awareness of opportunities for energy efficiency and global concern about the greenhouse effect. The result has been surprising improvements in energy use through the use of the best economically viable technologies available.
Better logistics management. Logistics systems are being redesigned to reduce shipping times and routes, optimizing their processing, improving vehicles, modifying the size of vehicles, using new routes, taking advantage of the best infrastructures.
Improvement in the use of resources. High environmental awareness and advances in technology are catalysing new approaches in areas such as the use of water, raw materials and packaging (recycling and reuse). The best use of resources, made possible by better technology, will permeate all parts of the value chain and will extend to suppliers and distribution channels.
Supply. Although traditional strategies suggest that companies must commoditize and maximize their bargaining power with suppliers to reduce prices, even when buying from small companies operating at subsistence level or in countries with outrageously low wages, some companies are starting to understand that these suppliers cannot be productive or improve their quality standards.
Distribution. Companies are beginning to reexamine their distribution practices from a shared value perspective. As demonstrated by iTunes or Kindle, new cost-effective distribution models can also dramatically reduce the use of paper and plastic. Similarly, microcredit has created a new profitable model to distribute financial services to small businesses.
Employee productivity. Practices such as keeping salary levels low, reducing benefits and relocating abroad are beginning to give way to the awareness of the positive effects on productivity of a living minimum wage, safety, well-being, training and development opportunities. for employees. If unions also focused more on shared value, these approaches to employees would also spread faster.
Location. Business thinking has accepted the myth that location no longer matters because logistics is cheap, information flows quickly, and markets are global. Therefore, the cheaper the location, the better, eliminating any concern for the local communities where it operates. This simplistic way of thinking today is being questioned, in part by the increases in energy prices as well as by the greater awareness of the cost of non-productivity caused by highly dispersed production systems and their supply problems.
Allow the development of local clusters.
No company is a self-sufficient entity. The success of all companies is affected by the companies and supporting infrastructure around them. Productivity and innovation are highly influenced by the “clusters” or geographic concentrations of firms, related companies, suppliers of products and services, and logistics infrastructure in a particular area, such as information technology in Silicon Valley, the cultivation of flowers in Kenya and the diamond cut in Surat, India.
Having stronger local capacities in areas such as training, transportation, and related sectors also increases productivity. Conversely, productivity suffers as its lack creates internal costs for companies:
A low level of education imposes costs on productivity and training.
Poor transportation infrastructure raises logistics costs.
Gender or race discrimination reduces the number of capable employees.
Poverty limits demand and generates environmental degradation, unhealthy employees and high security costs.
Local suppliers are capable of promoting greater logistical efficiency and easier collaboration. Therefore, companies create shared value by promoting clusters as it allows them to improve their productivity. Thus, the company ensures a reliable and quality supply so that it can incentivize its level of quality and productivity, while improving its income as well as the purchasing power of local citizens. The result is a positive cycle of economic and social development. Certainly a correct type of government regulation can favor this implementation.
To the extent that new jobs are created in the support sectors, multiplier social effects; New companies are born, the demand for auxiliary services grows, the supply of qualified workers for many other companies rises.
Nestlé case
As a responsible operating base and long-term business success, Nestlé believes that it must manage its operations as a responsible operating base and long-term business success, Nestlé believes that it must manage its operations in ways that meet the highest standards. high standards of business practices and environmental sustainability.
This implies compliance with relevant national laws and conventions, as well as with its own regulations, which often go beyond its legal obligations. These are embodied in its Nestlé Corporate Principles and related policy documents, and their application is verified through its CARE program and its internal Corporate Group of Auditors.
Beyond that, the way they do business is based on sustainability - ensuring that their activities preserve the environment for future generations. In line with the Brundtland Commission definition, sustainable development means for Nestlé "development that meets the needs of the present without compromising the ability for future generations to meet their own needs".
However, they believe that to build a profitable business for their shareholders, they must go beyond compliance and sustainability to a third level: creating long-term value for society and for its shareholders.
This is what they mean by Creating Shared Value:
- Use our business and operations focus strategies to create value for your shareholders Serve consumers and the public by offering nutritious products that can be enjoyed while contributing to their health and well-being
Seek to improve economic and social conditions for people and communities throughout their value chain - for farmers who supply them with the ingredients, for the communities where their factories are located, for the suppliers who work with them and for their partners market. (Nestlé, 2010)
Coca Cola case
The Coca-Cola Collective initiative in Brazil, for example, creates shared value by increasing the employability of young people with limited resources, while also serving to strengthen the company's retail distribution channels and the power of brand to increase your local sales.
In this process, the soft drinks multinational has introduced shared value into the company's corporate strategy, and has implemented a monitoring and measurement plan for the impact of this shared value from the point of view of the business itself.
Thus, in 2008, just six months after studying the needs of the middle-class Brazilian population, Coca-Cola identified the development of young people with low incomes as a strategic social segment on which it should focus.
As the document explains, even though the Brazilian government had been quite successful in providing primary education for all children, most low-income youth had little opportunity to find work because of their poor skills and competencies. within the communities to which they belonged.
To improve this precarious training and employability, Coca-Cola used the company's value chain. The multinational launched, with the help of local NGOs, the Collective initiative, with which it trained these kids for two months in entrepreneurship, business development and retail, while also contacting a local supplier of the company to help those guys get a job.
Since then, the multinational has continued with the initiative with very specific measurement parameters when evaluating its impact on local communities: percentage of employability of these young people, increased self-esteem of the boys, increased brand power of Coca -Cola and increase in sales of the drink.
From the moment of its implantation, Colectivo has been a success and has achieved that 30% of the kids it has trained have found a job in one of the multinational's local supplier companies. And from a business point of view, the investment in the initiative has been profitable after two years of life. (Roca, 2014)
conclusion
Shared value holds the key to opening the next wave of innovation and growth for companies. It will also reconnect the success of the company with that of the community.
Many factors such as the increasing social awareness of employees and citizens and the greater scarcity of natural resources will drive new opportunities.
The shared value perspective focuses on improving techniques for growth and strengthening the local cluster of suppliers and other institutions to improve efficiency, crop yield, product quality, and the sustainability of the primary sector. Its aim is that both farmers and ranchers and the companies that buy from them obtain a greater portion of income and benefits. It is true that a greater initial investment and time are required to implement the new supply practices and develop the support cluster, but the return will be a greater economic value and greater benefits for all participants.
References
Galvis, G. (2013). Shared value creation. Obtained from
Nestlé. (2010). Shared value creation. Obtained from
Roca, J. (2014). Measure shared value. Obtained from
Vinicio, M. (2015). Shared Value. Obtained from
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